TOKYO (Reuters)
—
Prime Minister Shinzo Abe is moving to shake up
oversight of the world's largest pension fund, expanding
the board and giving it new power to steer a shift out
of Japanese government bonds and into higher-yielding
assets, according to two people with direct knowledge of
the matter.

Officials are considering a proposal to add two or three dedicated
professional advisors to the committee that oversees investment at
the $1.26 trillion Government Pension Investment Fund (GPIF). They
would play a key role in reforming a fund that's bigger than the
economic output of Mexico with the power to influence markets as Abe
presses policies to spur growth.

The beefed-up GPIF committee could be given new, broader powers that
would make it the final arbiter for how the Japanese pension fund
invests its money, according to the people, who asked not to be
named because the policy measures remain under discussion.

The existing investment committee comprises academics and
economists, with a representative from Japan's trade union
federation and one from the main business lobby. Its current role is
restricted to advising the fund's president.

The proposed reforms would help shift GPIF towards riskier
investments like stocks and away from low-yielding Japanese
government bonds. Supporters of the reform say targeting higher
returns would benefit future pension recipients in Japan's ageing
population and drive economic growth.

A spokesman for GPIF said the fund would not comment on matters
under consideration as a matter of policy.

MATCHING PEERS

Earlier this month, Abe told a dinner hosted by the City of London
that reform of GPIF was under way and that the fund was "making
improvements".

Last June, GPIF lowered its allocation target for domestic bonds and
raised its target for stocks as part of a bid to achieve higher
returns. In March, the fund was given a target of hitting a return
of 1.7 percentage points over wage increases.

Taken together, GPIF has already seen more changes in the past year
under Abe than it has since its establishment as a public fund in
2001.

As part of those changes, a person with knowledge of the process
said GPIF's investment committee has formed a four-member working
group headed by Sadayuki Horie, a senior researcher at Nomura
Research Institute, that has been tasked with a review of its
allocation targets over the next two to three months. Horie declined
to comment.

As it reforms GPIF, Abe's government is betting that it can give up
a back-pocket means of financing Japan's government debt, now over
200 percent of GDP and the largest in the industrialized world.

GPIF currently holds 60 percent of its assets in Japanese government
bonds, but the Bank of Japan now buys up most new debt issued by
Japan's government as part of an aggressive monetary easing.

"Debate is already proceeding and we've indicated a direction for
GPIF in moving out of JGBs and into risk assets like stocks, REITs
and infrastructure funds," Japan Vice Minister Yasutoshi Nishimura
told Reuters.

The target for reformers has been to make GPIF more like overseas
public pensions, like those run by Norway, Canada and the state of
California. Those funds all hold more than half of their assets in
equities.

At the same time, they are staffed by hundreds of professionals to
vet fund managers and monitor performance. The Canada Pension Plan
Investment board employs over 900 staff. Japan's GPIF, by contrast,
has only about 80 staff.

Fidelity Investments, the private U.S. mutual fund giant, has about
$1.9 trillion under management as of April and employs over 40,000
people in North America.

'VERY SIMPLE'

Masahiko Shibayama, a lawmaker in Abe's Liberal Democratic Party who
heads the group preparing proposed financial reforms, told Reuters
in a recent interview that GPIF's investment committee needed more
authority.

"We think it's necessary to reform governance of GPIF," Shibayama
said. "I think there needs to be an official process so that the
knowledge of specialists can be reflected in decision-making. It's
very simple."

Shibayama declined to comment on the specific proposals his panel is
preparing, part of a June announcement of Abe's "third arrow" of
reforms, referring to the third plank of policies designed to revive
the world's third-biggest economy. Among measures expected to be
announced are a recommendation for a cut in the corporate income tax
level.

Last month, Japan's health ministry, which has a supervisory role
for the fund, appointed eight members to the GPIF investment
committee. Three of the eight also previously served on a separate
Abe-appointed economic advisory panel that recommended increasing
the role of financial professionals at GPIF and reducing its
reliance on Japanese government bonds.

The proposed reforms add a new note of uncertainty about the tenure
of the fund's president, Takahiro Mitani, a former Bank of Japan
board member with one year remaining of a five-year term. Mitani
declined a request for an interview.

Although Mitani is credited with helping to steer GPIF through its
still-developing reform, his tenure is also seen as symptomatic of
the passive and bureaucratic approach to fund management that the
Abe government is set to change.

One obstacle to hiring full-time fund managers, for instance, has
been GPIF's salary structure, which is in line with government
ministries. Mitani, who made the equivalent of $192,000 for the year
ended March 2012, has been the highest paid fund employee.

GPIF is in the process of selecting a consultant to review its
salary and bonus scheme for new and existing staff, a spokesman
said.